A more thorough explanation:

The applicable exclusion amount, also known as unified credit, is the total amount of gifts and estate transfers that are exempted from an individual's gift and estate taxes. This exclusion can be used on one gift, partially on gifts and partially on estate transfers, or entirely on estates. It is a contested area of tax law that changes frequently and creates a significant exception to the approximately 40% Federal estate tax.

Every U.S. citizen has an applicable exclusion amount for all gifts made inter vivos or estate transfers at death. Some gifts do not count towards the amount, such as to charity or paying someone's education expenses. There are also spousal exceptions that allow free transfers to the spouses without counting against the individual's lifetime exclusion amount, and a spouse can transfer what exclusion amount is not used in their lifetime to their spouse upon testacy.

The amount has ranged from less than $1,000,000 in 2000 to over $11,000,000 in 2018. In 2011, Congress set the amount at $5,000,000 with increases every year to adjust for inflation, and this method lasted for a few years until the Tax Cuts and Jobs Act of 2017 added $5,000,000 to the 2011 amount until 2026. After adjusting for inflation, the cap was set at $11,180,000 for the year 2018, and the cap is set to increase every year for inflation until reverting back to the prior $5,000,000 cap plus inflation. However, Congress has already debated multiple times reducing this cap since 2017, and if history serves, Congress will likely change the exclusion amount before it reverts back in 2026 to the 2011 system.

John gives his three children as a gift $4,000,000 each during his lifetime, and John has $10,000,000 pass to his children through his estate. If the applicable exclusion amount was $12,000,000, the lifetime gifts of $4,000,000 would not be subject to estate tax because they would not go over the $12,000,000 exclusion amount. However, all of John's exclusion amount would be used up on the lifetime gifts, and the $10,000,000 estate would face estate taxes of around $4,000,000. This example illustrates how the applicable exclusion amount can be used on lifetime gifts and estate transfers.

Sammy gives her daughter $20,000,000 upon graduating law school, and later, Sammy gives her daughter $10,000,000 more upon getting married. If the applicable exclusion amount is $12,000,000, Sammy would face gift taxes on $8,000,000 of the first gift and all of the second, resulting in about $8,000,000 in gift taxes. This example illustrates how the applicable exclusion amount can be exceeded, resulting in gift taxes.

Rachel and Ross are married, but Ross dies leaving $15,000,000 to Rachel without using any of his exclusion amount during his life. If the exclusion amount is $12,000,000, Rachel could use both her and Ross's exclusion amount to transfer $24,000,000 to their son without amassing any estate tax. This example illustrates how the spousal exception can be used to transfer more assets without incurring estate tax.